Introduction to Business Analysis (and Competitive Strategy) Dr. Theodore H. K. Clark Associate Professor and Academic Director of MSc in Information Systems Management Degree Program Department of Information & Systems Management Hong Kong University of Science & Technology Formerly Visiting Associate Professor of Operations & Information Management (Information Economics and Strategy Group) The Wharton School of the University of Pennsylvania

HKUST Business School 2 What is Strategy? Why do it? Strategy versus Tactics Strategy is when you have time to plan Time is a luxury many firms may not have Planning helps firms avoid failures or inefficiency Doing the right things, not just solving the urgent crisis Goal of Strategy is to Gain Advantage Faster growth, higher margins, or both Alternative is More Work, Resources, or Luck But, a good strategy can beat superior forces

HKUST Business School 3 What is Competitive Advantage? Comparable Advantage - Something you are better at than almost everyone else Circular slide rule example Swedish language example Competitive Advantage - A comparable advantage that MATTERS in your market Circular slide rule skills irrelevant; use calculator! Swedish MIGHT matter in some environments Would Cantonese be a competitive advantage?

HKUST Business School 4 Achieving and Sustaining Competitive Advantage Acheiving COMPETITIVE ADVANTAGE easier than SUSTAINING the Advantage over time Key Challenge is Becoming Hard to Copy Economies of scale and network externalities Access to key skills, resources, or suppliers Customer switching costs and brand preference Government policy (patents, antitrust, etc.) Fast (not First) Mover Advantage also Matters

HKUST Business School 5 Porter’s Five Competitive Forces that Drive Industry Profitability Potential new entrants Industry competitors Threats of substitute products or services Bargaining power of suppliers Bargaining power of buyers

HKUST Business School 6 Why is Industry Structure Important for Strategy? Implications of new investments or changes in environment can affect all firms Decisions on entry or exit of an industry Decisions on investments in new capabilities Understanding how technology affects firms Useful tool to examine how these forces act differently upon different firms in an industry Benchmark for understanding expected profits in an industry given these forces

HKUST Business School Three generic strategies Overall Cost Leadership Differentiation Focus Strategic Target Industry Segment Only Strategic Advantage UniquenessLow cost position “ Determining the cost/value tradeoff you wish to offer consumers is the most critical decision” - Porter

HKUST Business School 8 Porter’s Generic Strategy # 1: Leadership Based on Lower Cost Become low-cost producer in the industry Lowest total cost, not just low variable cost Often driven by economies of scale Must have parity quality or have lowest cost AFTER adjusting for quality differences Leveraging scale is common source of advantage in many industries Information goods may have difficulties with this strategy as costs of duplication are low

HKUST Business School 9 Porter’s Generic Strategy # 2: Differentiation and Segmentation Differentiation means to make your product unique and (hopefully) more valuable Becoming hard to copy is critically important Avoid commodity competition based on price Differentiation must be worth more to customers than it costs to create Horizontal differentiation (segmentation) versus vertical differentiation (quality) Less competition with horizontal differentiation

HKUST Business School 10 Porter’s Generic Strategy # 3: Focus or Niche Target Market Can be based on cost, differentiation or both By targeting a narrow market segment, you may be able to provide targeted products and services to that segment that are both low-cost and differentiated relative to less targeted firms Strategy is by design differentiated based on segment, as target market segment needs must be unique for focus strategy to work May be only option open for new entrants